March 14 (Bloomberg) -- The California Public Employees’
Retirement System, the largest U.S. public pension, voted to
lower its assumed rate of return for the first time since the
recession dragged down stock and real-estate prices.

The $235.8 billion fund’s governing board agreed in a vote
in Sacramento today to reduce its investment-return forecast
rate to 7.5 percent from 7.75 percent, after rejecting its
actuary’s 7.25 percent recommendation.

The rate is used to calculate how much money the fund,
known as Calpers, expects to have and how much it needs to cover
benefits promised to government workers, as well as the size of
municipalities’ annual contributions.

“Estimating pension liabilities isn’t about cherry-picking
numbers, but instead about how to accurately value pension
liabilities which are guaranteed by the state of California,”
Eileen Norcross, a senior research fellow at the Mercatus Center
at George Mason University in Arlington, Virginia, said in an e-mail.

Public funds such as Calpers have come under fire for using
higher investment assumptions to measure their shortfalls, from
critics including David Crane, a former economic adviser to
Governor Arnold Schwarzenegger. The California State Teachers
Retirement System, the second-largest U.S. public pension, cut
its expected earnings rate to 7.5 percent in February from 7.75
percent. The 18-month recession ended in June 2009.

Tax Burden

The Calpers change will add an estimated $167 million to
the amount California must pay from its budget in the fiscal
year starting July 1 to cover the costs of state public-employee
pension benefits, Actuary Alan Milligan said in a report to the
board. California paid $3.5 billion this year, he said.

It would also boost costs for local governments, such as
Stockton, California, which is already considering municipal
bankruptcy in part because of employee expenses. The board
ordered staff to phase in the increased costs to the state and
local governments over two years to help ease that burden.

The fund, which serves 1.6 million people, last adjusted
its rate of return in 2004, to 7.75 percent from 8.25 percent.

Calpers has earned 7.5 percent annually on average in the
past 20 years, according to Joe Dear, the system’s investment
chief. The Standard & Poor’s 500 Index has returned an annual
11.5 percent on average since 1982, according to data compiled
by Bloomberg.